Sighs of relief as inflation recedes

Consumer Price Index remains unchanged in May, easing pressure on

For consumers, inflation remains the Phantom Menace.

Yesterday, in one of the most widely anticipated government reports in months, the Labor Department reported that consumer prices were unchanged in May after a jump in April.

The numbers represent the strongest confirmation yet that inflation - long the great villain of the economy - remains largely under control during one of the longest economic expansions in US history.

Despite the good news, economists still expect the Federal Reserve to raise interest rates 1/4 of a percent at the end of the month. But the latest inflation report will take some pressure off the central bank to hike rates again later this summer. "Any Fed move will be very limited if there is one at all," says Bob Dederick, a consulting economist at Northern Trust Company in Chicago.

If the Fed acts, it will come against the backdrop of a strong US economy and some improvement around the globe. Yesterday, the government reported the housing market perked up in May after three months of decline. Last week there were signs of recovery in Japan, Germany, and East Asia. "Evidence does suggest the worst is past, and that eliminates the need for easing what we had last summer," says Mr. Dederick.

Wall Street initially reacted favorably to the CPI news. The Dow Jones Industrial Average was up more than 150 points in the first few hours of trading.

Economists expect to get a better idea of what Fed Chairman Alan Greenspan is thinking when he testifies on Capitol Hill today. Recent remarks by other Fed officials indicate a desire to tighten interest rates.

"They seem determined to raise rates," says Bruce Steinberg, chief economist for Merrill Lynch & Co.

For months, Mr. Greenspan has been warning that productivity gains - although wonderful - can't continue to keep prices down. There are now some signs that commodities used in the early stages of production are increasing in price.

But it's unclear if manufacturers will pass the added costs on to consumers or just absorb them. "It may just get squeezed out along the way," says Dederick.

Economists point to the May CPI as an example of how rising prices are being kept under control. Many items that went up in April either moderated or came down. Medical care, which rose 0.4 percent in April, was up only 0.2 percent in May. New vehicle prices dipped 0.1 percent.

Economists became concerned about inflation last month after the CPI rose by 0.7 percent. Among the areas where there were increases: lodging, air fares, entertainment, and prescription drugs.

"There are little pockets of inflation - you don't see general price increases," says Donald Ratajczak, an economist at Georgia State University in Atlanta.

Some of these price increases should not resurface again soon. For example, in April, apparel prices rose after several months of decline. Normally, after Easter, retailers start to fill up discount racks. But because of healthy demand, retailers kept clothes at full price. In May, apparel prices dropped 0.2 percent.

In the past, consumers would have shopped around until they found a bargain. According to retail sales data, consumers are still shopping: They just aren't as diligent in finding sales.

Moreover, vendors have gotten more adept at hiding price hikes. "Airlines may claim they are selling seats for $39 one way, but then you find it's two seats on the 5 a.m. flight," says Ratajczak

Consumers say they haven't seen much in the way of price hikes. Interior designer Linda Cameron of Bethlehem, Pa., notices that gasoline prices in her area have risen a few cents a gallon. But she says her grocery bill - a main daily expenditure - is steady.

In Santa Monica, Calif., Marc Samson, a marketing specialist, isn't feeling the pinch of inflation either. Mr. Samson recently purchased a new computer and was surprised at the prices. "I felt I got a very good deal," he says.

Others see increases in select areas. Jenifer McShane, a Norfolk, Va., consultant for nonprofit groups, says air fares have gone up more than she was expecting. She recently looked at booking flights to New York and Los Angeles. "I thought they would be a little more reasonable," she says.

In part because prices remain so stable, consumers are still marching to the malls. The latest Conference Board survey found consumer confidence rising for the seventh consecutive month - the longest upturn in the 32-year history of the survey.

"Low inflation and a strong job market are providing a durable foundation for historically high levels of consumer confidence," says Lynn Franco, associate director of the Conference Board's Consumer Research Center.

Consumer optimism may reflect longer economic and inflation trends. For the past year, inflation, as measured by the CPI, is up only 2.2 percent - one of the lowest rates in 30 years.

(c) Copyright 1999. The Christian Science Publishing Society

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